Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse
By Joshua Holland, AlterNetPosted on September 22, 2008, Printed on September 22, 2008
The immediate cause of our financial meltdown is unchecked, unbridled greed. Mainstream newspapers and the business press are doing a fairly good job of explaining how the lack of regulatory oversight led us into this nightmare.
But you have to dig down one layer to find the cause of that situation. Under cover of the ideological euphemism known as the "free market" and with enormous cash investments over the past four decades, business elites have captured the regulatory organs of powerful democratic states -- nowhere more so than the United States -- and promoted their own narrow economic agendas for short-term gain.
There's an enormous amount of discussion about that in the independent media. But to drill down a layer deeper, to the bedrock of the crisis, you have to go to some deep thinkers who don't get much play in our mainstream economic discourse.
As foreign policy analyst Mark Engler notes in his new book, How to Rule the World, declining returns on traditional investments in manufacturing and industry since the 1970s go a long way toward explaining today's highly speculative economy -- pushing capital into developing countries and into bubble after speculative bubble in search of a better profit margin.
It's important to understand what's going on at all three levels, because we may have come to a fork in the road, a point at which the decisions made now may determine the future of the global economy.
We may or may not also be on the verge of another Great Depression.
The Bush Bailout: Privatizing Gains and Socializing Risk
On Saturday, hoping to stave off that dark possibility, the Bush administration proposed an unprecedented bailout for investors, a scheme that would authorize the Treasury Department to spend as much as $700 billion in tax dollars over the next two years to buy up bad securities, with little Congressional oversight save for a semiannual report on the process.
The move came after the federal government had already sunk a total of $900 billion into America's financial institutions this year, potentially bringing the total value of the Fed's tinkering to $1.6 trillion over three years.
The White House, Congressional leaders and Treasury officials are haggling over the details. Things are moving quickly, with a mammoth intervention that was unspeakable in economic circles a month ago now looking more and more inevitable.
The structure of the proposed bailout may change during those negotiations -- Democrats in Congress are pushing to save more homeowners and tie the package to some sort of limits on CEO pay for institutions that get a lifesaver -- but the deal outlined in the brief document released on Sept. 20 epitomizes the principle of privatizing gains while socializing risk. In other words, we're splitting an oil well with the Big Boys on Wall Street: They get the oil, we get the shaft.
It is, in short, a draft of what could be one of the greatest rip-offs in history. Bush, on the way out of power, is trying to create a publicly financed honeypot for the private sector on a scale never before imagined.
Those who played fast and loose with newer, ever shakier investment instruments in order to squeeze a few more bucks out of the markets' "irrational exuberance" about the housing sector would get a payday that would save their bacon. According to the New York Times, this huge pile of taxpayers' cash may even be available to foreign investors.
Home prices would continue to tank, though, as banks shed their bad loans at discounted prices to the government. Those subsidized assets would then be liquidated -- on the cheap because they're so overvalued -- to resuscitate the financial system. Rick Sharga, a senior officer with RealtyTrac, which monitors the housing market, told Reuters, "We've seen fewer and fewer properties go through the auction process because there's either little equity in them or even negative equity. So there's no incentive for people to buy them at the auctions."
Sharga added that "bank repossessions continue to grow at a pretty rapid clip," but an analyst told me recently that he knew of banks that simply weren't taking possession of foreclosed properties because they didn't want them on their balance sheets.
As those assets are disposed of, the value of all Americans' homes will continue to fall, because sales of comparable properties determine their worth. That would, in turn, leave a greater number of Americans with mortgages worth more than the amount of equity in their homes, and the cycle would continue. Things are already bleak on that front; the rate of U.S. foreclosures increased 75 percent in 2007 and 55 percent in the year ending this June. The Associated Press reported, "More than four million American homeowners with a mortgage, a record nine per cent, were either behind on their payments or in foreclosure at the end of June."
Many more will lose their homes, and all of us will get the tab: higher taxes, swelling deficits, higher interest rates and a moribund economy.
The plan doesn't specify what, if anything, U.S. taxpayers will get in return for their largesse. The government isn't spending more than a trillion dollars to nationalize failed institutions in order to protect stakeholders and liquidate those overvalued assets in an orderly manner. That might make a lot of sense, and it would essentially make Joe and Jane taxpayer owners of something that might rebound in value down the road.
Instead, Bush's proposal would take bad paper off the books of institutions that are ailing but haven't yet gone belly-up, and we wouldn't necessarily get a stake in those institutions; they'd only become "financial agents of the government," according to the draft released Saturday.
As Paul Krugman notes, "historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets."
The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the (Resolution Trust Corporation, founded in the wake of that crisis). The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.
The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system -- that is, convince creditors of troubled institutions that everything's OK -- simply by buying assets off these institutions.
Making matters even worse is the fact that it's almost impossible to put a fair market value on this massive pile of bad debt. As Peter Goodman of the New York Times notes, "no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday."
There will be a fight in Washington, and much debate, about which ideological direction the bailout should lean, and the version offered up by the Bush administration is -- no surprise here -- tilted heavily in favor of those at the top of the economic pile.
What's clear is that there is going to be a massive transfer of public wealth to the private sector, and at least the lion's share of that cash, if not all of it, will end up in the hands of an investor class whose recklessness got us into this mess in the first place.
Meltdown
This bailout is a desperate attempt to save the modern economic system from falling under the weight of its deep structural imbalances. As such, it's unlikely to work over the medium and long terms, even if it has the desired immediate effect of propping up creaky markets and restoring their (largely unjustified) sense of security.
The proximate cause of the financial system's meltdown is not all that hard to grasp. The decades-long supremacy of the ideology euphemistically called "free trade" resulted in capital being unmoored from national economies and freed to move around the world with few limitations (under the imperative of government not "intervening" in markets). Unconstrained by borders and investment rules, those dollars, yen, euros and what have you roamed the planet seeking a better rate of return. Investors moved in packs, rushing lemming-like to whatever hot up-and-coming market the Economist was writing about in a given month, and a series of bubbles resulted.
Those bubbles made some people incredibly rich, and hurt others badly.
Of late, real estate was the can't-miss investment, and as enormously overvalued housing bubbles sprang up, notably in the United States, Wall Street's financial whizzes started offering newer and more "creative" investment vehicles, bundling mortgages and selling them off to investors from around the globe.
That was driven by an era of relentless deregulation, both at home and abroad. Here in the United States, the trend of deregulation culminated in 1999 with the death of the Glass-Steagall Act, the New Deal-era legislation that had forced financial institutions to choose between investment banking and commercial lending. Meanwhile, international bodies like the WTO and the IMF were pressuring the governments of all countries to drop their controls on the flow of cash and goods.
Without fear of a regulatory backlash, the banks pushed their new investments hard, and investors gobbled them up with glee. Writing in the Columbia Journalism Review, Dean Starkman cited reports from the business press about loan agents at Ameriquest being ordered to watch "Boiler Room," the film about sleazy financial brokers pushing bad investments on gullible retirees (Ameriquest was a predatory subprime lender that went down last year). Starkman quoted an executive with Morgan Stanley's mortgage unit as saying, "It was unbelievable. We almost couldn't produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce."
In the end, investors were basically buying up paper that had only a distant relationship with anything concrete. The link that had long existed between homeowners and lenders was broken, and debt -- in this case debt tied to housing, but also commercial and consumer debt -- became a hot investment vehicle.
Convinced that the market would continue to grow indefinitely -- or maybe that they'd get bailed out if things headed south -- investors leveraged their assets further and further, in effect buying on margin just like the bad old days before the Crash.
The banks and investment houses worked hard to find new ways to make their own pounds or rubles, creating not only new types of debt-based securities, but also coming up with new forms of insurance to (supposedly) shield investors against the risk those loans represented.
That was all well and good for them, if not for the rest of us, until the housing market started to tank. Despite assurances from the government earlier this year that the disaster had been "contained" to the subprime market, it began to spread. As the Associated Press reported, the tanking real estate market "shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments." Bloomberg reported that 3 million American homeowners are holding prime (or, actually, semi-prime) "alt-A" loans (don't ask) worth about $1 trillion, or $150 billion more than the entire outstanding subprime market.
As those loans -- many of which were taken on investment properties by people expecting a nice, quick turnover -- started to go belly-up, a panic ensued. As the rot spread, banks started going down and investors essentially began a stampede on an already weakened financial sector. It was the modern-day equivalent of a bank run, but on a global scale.
That posed a risk to the mammoth and wholly unregulated market in insurance on bad loans that had grown up around these new kinds of investments. The market in what are known as "credit default swaps" is of unknown size, but it's estimated to be worth as much as $60 trillion, most of it essentially paper backed by too little in the way of hard assets.
The government knew that if that market tanked, it could take down the global economy. That threat was, in large part, the thinking behind the $85 billion dollar bailout of AIG less than a week ago -- AIG was a key player in this huge but hazy market, and it did business with banks around the world.
At that point, a feeling of panic was spreading, and lawmakers in Washington felt that they had to do something, anything, to stop the meltdown. The banking sector's crisis threatens the entire economy, as the capital needed for new investment and expansion has begun to dry up. Jared Bernstein of the Economic Policy Institute told the New York Times that "Wall Street isn't this island to itself" and warned that if the finance sector "gets worse, we're going to be stuck in the doldrums for a very long time, because that directly blocks healthy economic activity."
Global Capitalism's Crises of Poverty and Overproduction
The financial meltdown in the United States is huge, but it isn't unique. Think of the Asian financial crisis, Mexico's "peso crisis" or the dot com crash. All had one thing in common: an investor class that at one time valued thrift, limited risk and steady growth plunged trillions with almost suicidal abandon into one bubble after the next.
All of which begs the question of what it is about our modern economic system that creates this cycle of inflating and bursting bubbles.
The answer, in large part, comes down to a decline in profitability in investments in concrete things, which has sent investors scurrying for abstract financial instruments in search of a fat return.
That shift, in turn, results from a simple aberration: a small fraction of the planet's population is tied to an economic system in which productivity is effectively an end unto itself. It makes tons and tons of widgets, always seeking new widget markets (and sucking up most of the planet's raw materials). At the same time, the powerhouses of the global economy -- the United States, Europe, Japan and the "Asian Tigers" -- have given woefully low priority to economic development in the rest of the world. They've essentially relegated it to NGOs and an underfunded United Nations, and in their own development funding they've prioritized geopolitics -- their "national interests" -- over poverty relief.
That's left much of the rest of the world's population (and this includes people in the wealthiest countries as well as the poorest) with barely enough money to feed their families, much less buy all those widgets. According to the UN, 80 percent of the people on the planet live on $10 dollars a day or less, and they're not going to take many flights on Boeing's shiny new airplane, buy GE's dishwashers or use Nortel's broadband. Over just the past two years, the number of people living on the "edge of emergency" -- in imminent danger of starvation or death from disease epidemics -- has doubled, zooming from 110 million people to 220 million, according to CARE International.
In other words, at the heart of the current crisis, like those that preceded it in recent years, is a massive imbalance inherent in the modern system of capitalism. It is caused by twin crises inherent in the structure of our global economy: a crisis of overproduction in the "core" states with advanced economies, and soul-crushing poverty in much of the "periphery."
In the booming years after World War II, the wealthy countries, led by the United States, did very well manufacturing goods for the entire planet. But as Europe and Japan rose from the ashes, and later, as production in countries like Taiwan, South Korea and Singapore increased, the industrial world simply started making more crap than there were consumers to purchase it.
Capitalism's tendency toward overproduction has been something with which thinkers dating back to Karl Marx have wrestled. If, as one definition holds, capitalism is all about maximizing efficiency, what happens when meaningful production becomes so efficient that the system ends up cranking out more goods than the population needs -- more than it can absorb?
The answer is simple. Since the middle of the last century, investors' returns on real production -- manufacturing -- has been in steady decline. Economist Robert Brenner described it as a "long downturn" in the world's most advanced economies. He noted that the seven leading industrial economies grew by a steady rate of 5 percent or more annually from the end of World War II through the 1960s, but in the 1970s that fell to 3.6 percent, and it has averaged around 3 percent since 1980.
The social critic Walden Bello has arguably been the clearest voice connecting the problem of overproduction to the rush of speculation that has led to today's financial crash. Bello noted that in the 1990s, the heyday of corporate globalization, the "U.S. computer industry's capacity was rising at 40 percent annually, far above projected increases in demand."
The world auto industry was selling just 74% of the 70.1 million cars it built each year. So much investment took place in global telecommunications infrastructure that traffic carried over fiber-optic networks was reported to be only 2.5 percent of capacity. Retailers suffered as well, with giants like K-Mart and Wal-Mart hit with a tremendous surfeit of floor capacity. There was, as economist Gary Shilling put it, an "oversupply of nearly everything."
A report in the Economist, cited by Bello, found that the world of Clinton's "New Economy" was "awash with excess capacity in computer chips, steel, cars, textiles and chemicals," and noted that "the gap between capacity and output was the largest since the Great Depression."
An inevitable result of that imbalance was a massive migration of capital from real, productive industry to the "speculative sector" run by financial giants like AIG and Lehman Brothers. As Bello noted:
So profitable was speculation that in addition to traditional activities like lending and dealing in equities and bonds, the '80s and '90s witnessed the development of ever more sophisticated financial instruments such as futures, swaps and options -- the so-called trade in derivatives, where profits came not from trading assets but from speculation on the expectations of the risk of underlying assets.
Exacerbated by a relentless assault on public interest regulation and economic nationalism under the guise of "free trade," the increasingly speculative tendencies of global investors created fertile ground for the growth of that pile of bad paper to which the Bush administration is reacting with its trademark brand of top-down reverse socialism.
In a nutshell, our modern economic system has become divorced from what an "economy" is supposed to do in human terms. It was anthropologist Karl Polanyi who argued that the term "economics" has both a formal meaning -- a system of exchange of goods and services designed to maximize efficiency -- and a "substantive" one: the survival strategy of humans in their natural environment. It's a concept that transcends conventional economic concepts of supply and demand, markets and states, and it's one that we've ignored for too long.
As the financial sector threatens to fall apart around us, it's important to understand the crisis on all of these levels, or we run the risk of losing sight of the forest for the trees. One has to keep in mind that this is all happening during the era of the $100-plus barrel of oil, with the global economy integrated more than ever before and during a period of deep environmental peril due to global climate change and related problems of drought and desertification.
With the Bush administration pumping more than a trillion dollars into the private sector, Jim Bunning, the junior senator from Kentucky, lamented that the "free market for all intents and purposes is dead in America." As more mainstream economists talk about the possibility of sliding into a full-blown depression, we may well be in the grip of a kind of economic "Grotian Moment." The term, named for the 17th century Dutch legal philosopher Hugo Grotius, describes an event that has such a great impact that it results in fundamental changes to the prevailing system.
Slavoj Zizek wrote that "One of the clearest lessons of the last few decades is that capitalism is indestructible. Marx compared it to a vampire, and one of the salient points of comparison now appears to be that vampires always rise up again after being stabbed to death." That's true; for a generation, we've been constrained from even discussing the fundamental structures of the prevailing system -- its excesses and shortfalls. This may be a moment in which we can do so, and should.
If we are at such a juncture, then we as a society have a serious question to answer: Will we bail out the speculator class so that it can regroup and move on to the next bubble, precipitating the next crisis of capitalism, or will we address the underlying problems of underdevelopment and overproduction in a way that's adequately sustainable in an era of serious environmental peril?
So far, Bush and the Congress appear to have the wrong answer.
Joshua Holland is an AlterNet staff writer.
© 2008 Independent Media Institute. All rights reserved.View this story online at: http://www.alternet.org/story/99703/
Monday, September 22, 2008
Sunday, September 21, 2008
“Economic 9/11,”
With the September 15, 2008 “Economic 9/11,” Are We Facing Depression Like 1929?
© 2008 by Linda Moulton Howe
“This is a classic Titanic situation in the sense that what we saw with the Fannie and Freddie bailouts and the Bear Stearns bailouts and now the AIG request for more than forty billion more dollars from the federal government – it’s just like the Titanic where the rich and affluent were given the lifeboats and the rest of the people went under from steerage. The rich and powerful are too big to fail; the rest of us are too small to save.”- Gerald Celente, Editor and Publisher, The Trends Journal
“They (Republican Party) had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.” - Franklin Delano Roosevelt, 1936, quoted in The FDR Years © 1995 by William Leuchtenburg
Crowd at New York's American Union Bank during a bank runearly in the Great Depression that began in 1929. The bank opened in 1917,and went out of business on June 30, 1931. Image source Wikipedia.
Crowd at IndyMac Bank in Pasadena, California, on Friday, July 11, 2008, after the federal government took control in the second-largest bank failure in U. S. history. Financial experts predicted at least 50 to 100 bank failures in the United States after IndyMac Bank.
Updated 11:00 PM EDT September 17, 2008 - Dow closed 450 down today in continuing “Economic 9/11,” after Feds loan AIG $85 billion and oil and metals spiked upward. “Right now, citizens don't trust banks and bankers don't trust other bankers. The financial system is freezing up,” said a CNBC Business Network analyst.
Investors also considered a report on new home construction that showed that housing starts dipped to a 17-year low. Further, the FDIC website lists 11 bank failures in 2008 since April, the latest being Silver State Bank in Henderson, Nevada, on September 5, 2008. The Pasadena, California, IndyMac Bank FDIC takeover on July 11, 2008, was the second largest bank failure in American history.
September 15, 2008 Rhinebeck, New York - Back on December 21, 2007, I interviewed Gerald Celente, Editor and Publisher of The Trends Journal based in Rhinebeck, New York. Mr. Celente has been interviewed by network newscasters for years and his trend predictions are generally correct. Below is the December 21, 2007, Earthfiles Headline and report I filed.
Trends in 2008
© 2007 by Linda Moulton Howe
“In 2008, we’re going to see some major, giant financial firms fall as they get hit by an economic 9/11.” - Gerald Celente, The Trends Journal
Trends Research Institute, Rhinebeck, New York. Also see: 122107 Earthfiles “Trends in 2008.”
Today, September 15, 2008, I talked to him about his forecast for an “Economic 9/11” - ironically an interview on the same day, September 15, 2008, that Lehman Brothers declared bankruptcy, Merrill Lynch sold to Bank of America for $50 billion and AIG begged the federal government for a $40+ billion bailout. AIG is a huge insurance company doing business in 130 countries with a trillion dollar spreadsheet.
More falling financial dominos from banks to other companies are expected. Are we facing depression greater than the “Great Depression of 1929?” I took that question to Gerald Celente and began by asking him how he was so accurate back in December 2007?
Interview:
Economic 9/11
Gerald Celente, Editor and Publisher, The Trends Journal, Rhinebeck, New York
Gerald Celente, Editor and Publisher, The Trends Journal, Rhinebeck, New York:“Current events form future trends. If you saw the current events unfolding, you could have seen – if you looked at the data objectively – you could have seen where the future was headed. But what happens is that the business media keeps downplaying the seriousness of events. They are not looking at the real fundamentals of what is going on. They are stuck in their Wall Street and Washington worlds. They don’t see what is going on throughout society.
In 2007, our summer edition of The Trends Journal, we warned that between July and November 2007, we would see a major financial crisis. That was the so-called ‘sub-prime’ crisis. What people needed to understand that they would not understand was that it wasn’t only the little people who caused those problems by taking out mortgages they could not pay off. That was only a small part of it. The big part of it was that all of these leverage buyout firms, all of the commercial real estate people, all of the developers that were building on speculation.
You had companies in New York, for example, like The New York Times reported of one that had about $60 million that they leveraged into $60 billion worth of real estate. Look at all the buyout firms such as The Blackstone Group, Carlisle Real Estate, Carlyle Group, Cerberus that bought Chrysler and Hilton. It’s not like these guys put up a billion dollars each and twenty of them bought a company. They bought these companies with no money down based on leverage.
Then there all the financial manipulations: auction-raised securities, Compulsory Purchase Orders (CPOs), Structured Investment Vehicles (SIVs). I mean they make up this stuff and it’s really a Ponzi scheme.
[ Editor’s Note: Wikipedia – “A Ponzi scheme was named after Charles Ponzi, who emigrated from Italy to the United States in 1903 and became notorious for the following scam. A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (alleged profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.”]
It was all collapsing in front of us, but people did not want to believe it. We saw it coming. The top story in our Top 10 Trends of 2008 was the Panic of 2008 and Economic 9/11. We were precisely one week off in calling this the Economic 9/11 (September 11, 2008 was the seventh anniversary of the World Trade Center attacks). And it’s happened! This is the Economic 9/11. The Federal Reserve, the federal government, cannot save the day.
A Great 2008-2009 Depression? “The Feds cannot print enough money to save the day. We’re going into the worst depression that any living person has ever seen. It’s going to be worse than the Great Depression of 1929.”
Do you realize that Barack Obama recently said that he would not rescind the Bush tax cuts. He said this on ABC, September 7, 2008, IF the economy were in a recession. IF the economy is in RECESSION?! This is worse than a recession! We’re going into the greatest depression and people better beware.
I’ll tell you what I know other people are doing. They are taking their money out of the banks. People with a lot of money are moving it overseas into what they think are safer banks. There’s going to be a day here in the United States that the authorities are going to call a Bank Holiday. AIG is calling for more than $40 billion today. The Feds just bailed out Freddie Mac and Fannie Mac to the tune that could cost taxpayers up to $300 billion or more. Our national debt has been increased to at least $12 TRILLION! The Feds cannot print enough money to save the day.
So, we believe what the government is going to do is call a ‘bank holiday.’ You’re going to hear all those fat mouths out there that were saying that everything was OK, the FDIC was going to insure your money. But, Linda, no one is going to be able to get it out all at once. Just like they did in Argentina and they did it in Brazil when their economies collapsed and their currencies collapsed and their economies were sinking. You’re not going to be able to get all your money out at one time. Our government is going to say, ‘It’s insured. Don’t worry about it, but we need to pause. Take a deep breath.’ Oh, boy, do they love that phrase! ‘Take a deep breath.’
Take a look at this last Saturday’s (September 13, 2008) New York Times. The headlines story on the business page is to just pause and reflect. Don’t panic. Everything is OK. The ship is sinking and the best they can say is, ‘Doesn’t the band sound great!’
Implications for Future
WITH EVERYONE RUNNING TO TREASURIES AND INTERNATIONAL MARKETS ON SEPTEMBER 15, 2008, WHAT IS THE BOTTOM LINE TO THE IMPLICATION OF WHAT IS HAPPENING NOW?
We’re going into the worst depression that any living person has ever seen. It’s going to be worse than the Great Depression of 1929 and I’ll give you a some reasons why.
1) In the 1929 Depression, not many people owned homes, so they weren’t carrying that heavy mortgage load. The people who did have homes did not have something called ‘home equity loans,’ which is more money owed on top of the other money. They used to have something else back then called a ‘second mortgage.’ If you had one, you were a loser.
2) Back in the 1929 Depression days, people didn’t have things called ‘credit cards.’
3) The United States didn’t have $14 trillion worth of debt.
4) We still had a manufacturing base in the United States so that when WWII broke out and the economy improved afterwards, we were still able to produce more so than any other country in the world. But now, the U. S. off-shores so much manufacturing now.
5) Back in the Great Depression of 1929, the U. S. government was not $14 trillion in debt and they had a trade surplus, not a trade deficit.
6) We weren’t fighting two wars that have sapped already $2 trillion from our American treasury and it’s getting worse.
“Dragflation”
So, we’re going into a downturn as America is sinking. This is ‘dragflation,’ a term that we at The Trends Journal have coined. When you had stagflation you had a declining and stagnate economy; you had rising inflation. But you also had rising wages. People remember back in the 1970s, they got a 10% cost-of-living increase in our wages.
Now wages are declining, you’re lucky to have a job, the median American household income is below 1999 levels. So we’re in for a devastating crash and people are not prepared for it.
2008's Weak American Dollar
THE TOTAL AMOUNT OF GOLD BULLION IN THE UNITED STATES IN THE FEDERAL RESERVE AND AT FORT KNOX IS ONLY IN A FEW BILLION DOLLARS IF TRANSLATED INTO CURRENT MARKET VALUE. WITH A $14 TRILLION DEBT IN THE UNITED STATES, IT MEANS THAT THE DOLLAR IS NOT BACKED UP BY MUCH.
You’ve got it and it’s not only the dollar we are going to see problems with. We’re going to see all the paper currencies experience the same kind of problems. You’re looking at a global market unraveling. The Russian stock market is down almost 45% from the beginning of 2008. The Chinese and Indian are all down 40% to 50% from their highs. We’re going through a global crisis. We’ve been talking about this for a long time. I was just the keynote speaker at the International Diamond Conference in New York at the Waldorf Astoria on September 8. This is what we at The Trends Journal warned: the United States is going to go into a depression and the rest of the world into different levels of deep recession and depression.
If you look at the markets today, what’s going up and what’s going down? The softer commodities are retreating and the only thing going up in the markets today is gold. It’s coming off its lows where it’s been battered down, but it’s up some $17. We’re still firm believers that gold and diamonds and other precious gems and metals are going to be the things to invest in as the paper currencies collapse. There are no fiscal or monetary tools that can turn this around.
What people I know are doing is taking their money and putting it into other currencies, particularly the Swiss franc, and putting it into more secure international banks, and betting against America on every level. And we know it is only going to get worse. There is nothing to turn this around. What is the Federal Reserve going to do? Print more money?
On September 16, the Federal Reserve is going to decide whether or not to raise or lower interest rates. If they lower interest rates, you’re going to see the dollar plummet. If they keep interest rates the same, then we have the same situation we’re in now. They can’t raise interest rates. If they do, they will put the brakes on an already credit-squeezed economy and that will really push us into a really steep depression quicker than what we have seen. Looking across Europe, you can see the markets collapsing, along with the Russian market down 45%. There is no safety net. Ships do sink!
We like the Swiss franc because Switzerland always seems to survive at the worst of times, including back to World War II. But the Swiss banks are having problems, too. So, you have to be careful about which banks you put your money into. But what we’re saying is that people we know are hedging their bets by keeping some money in dollars and some money in Swiss francs, some money in Euros, so that if one goes down, others are up. So, you are preserving wealth. That’s the game right now. It’s not about making more money. It’s about preserving what you have.
Global Economic Depression?
In China, factory orders are plummeting. They have 1.2 billion people and millions of problems. So, they are not going to escape this global economic collapse either. There is no way out.
Remember the old fable about the grasshopper and the ant. The grasshopper played during the summer thinking it didn’t have to do anything to survive the cold winter coming. People are still acting like grasshoppers. What people are saying is, ‘I’m going to wait until after the elections to see what happens.’ To see what happens for what? The people running for office don’t have the economic skills.
AND WHOEVER IS ELECTED IN NOVEMBER 2008 IS INHERITING THE $14 TRILLION IN DEBT.
On top of that, government, corporate and private debt is over 200 times the gross domestic product, much worse than the Great Depression of 1929.
And Greenspan was saying as recently as May 2008 that the worst was behind us. So, too, was Hank Paulson, the U. S. Treasury Secretary. So, too, was the head of Lehman Brothers, Merrill Lynch and J. P. Morgan. They were all saying that the credit crisis was not as bad as it was because of the great bailouts of Countrywide and Bear Stearns. So, they were singing a different tune than now.
Never before have current events been so clear in front of us that spelled disaster. What is stopping people from admitting that the worst is yet to come and there are no plans to save it? This is a classic Titanic situation in the sense that what we saw with the Fannie and Freddie bailouts and the Bear Stearns bailouts and now the AIG request for $40 more billion from the federal government – it’s just like the Titanic where the rich and affluent were given the lifeboats and the rest of the people went under from steerage. The rich and powerful are too big to fail; the rest of us are too small to save. When we need to be saved, the government saves us with Katrina-quality rescue plans, which means that we drown.
United States Conditions in 2009?
“This Christmas 2008, you’re going to see major chains go bankrupt. If you can see Lehman Brothers go under – guess what? Macy’s, J. C. Penny, GAP and the rest of them could go down, too.”
IF THIS IS WORSE THAN THE GREAT DEPRESSION OF 1929, COULD YOU LAY OUT WHAT YOU EXPECT TO SEE HAPPEN OVER THE REST OF 2008 AND TO FALL 2009?
Let’s take retail sales, for example. This Christmas 2008, you’re going to see major chains go bankrupt. If you can see Lehman Brothers go under – guess what? Macy’s, J. C. Penny, GAP and the rest of them could go down, too.
All these companies, like the leverage buyout firms, have been built on an economic model of growth and expansion. That means opening new stores in new locations, but not necessarily increasing in store sales. You’re going to see major bankruptcies. We forecast this before. It’s going to happen.
You’re also going to see violence go to levels we’ve never seen before. You’re going to start to see gangland mentality that is running through Mexico start seeping up north into the United States. The Mexican government cannot control the level of violence. And we’re going to start to see it happening here: more gangs, more kidnappings, more violence and crime. The knee jerk reaction, of course, will be more police on the streets and that is not going to solve the problem.
We’re also going to see more movements for the break up of the American government – not necessarily in 2008, but we can certainly see the secessionist movements that have been gaining more strength because the federal government cannot fix this problem. It’s too big.
Alan Greenspan - Is Former Fed Chief Cause of Financial Dominoes Falling?
Greenspan is the guy that’s behind this whole collapse. By lowering interest rates during the dotcom bubble of 2000. They lowered the interest rates to 46-year-lows and created the situation that exists now for all this cheap money and all the financial games. Greenspan is the Prince of Destruction. The Federal Reserve is what is behind the destruction of this country and now Greenspan is warning us! He’s the one who caused all this!
Ron Paul (former candidate in 2008 presidential primary) has informed the people that the Federal Reserve is basically a rogue organization. It’s a private bank, it’s not a federal agency. They have taken the power of the money printing press out of the hands of Congress (Article 1, Section 8, Clause 5) that gives Congress the sole authority to print and regulate the money supply. And Alan Greenspan is the one that caused this Great Depression. He started it by bailing out the big guys following the 1987 Stock Market Crash, following the 1997 Asian currency crisis, following the 1998 long-term capital management bailout. I had an Op Ed piece in The New York Times in 1998 that I called ‘Capitalism for Cowards.’ This is what keeps happening – bailing out the big guys by printing cheap money because their friends are too big to fail.
WHAT HAPPENS THIS TIME IF THE UNITED STATES DOES NOT BAIL OUT AIG AND GIVE THEM THE $40 BILLION THEY ARE ASKING FOR?
It’s not going to make any difference whether they bail them out or not.
BUT IT’S IN MORE THAN 130 COUNTRIES WITH A TRILLION DOLLAR BALANCE SHEET.
Yes, but there are other huge ones that are going to be collapsing right along with it. What is going to happen when Blackstone goes under? Or Ceberus goes under? Or the Carlyle Group goes under? We’ve already eliminated the big names of Lehman Brothers and Merrill Lynch. Merrill Lynch was the nation’s largest brokerage firm and they were just gobbled up by Bank of America that was just gobbled up by the failing Countrywide. Who is going to bail out them? There is not enough money to bail them out. Where is the money going to come from? Americans are working two or three jobs already. Do you think they could do four jobs to bail these big people out? Impossible! We’re looking at the collapse of Empire America.
The 9/11 attack happened and it was the greatest military strike in history, much greater than the Trojan Horse. It brought down the financial pillars of the United States figuratively and literally.
The United States as not recuperated from the great strike of 9/11 and the debacle of the dotcom crash. It was temporarily ameliorated by Greenspan by putting interest rates at 46-year-lows and creating the credit bubble. So, it’s over now.
The United States looks like to me what you see when a third world country starts going into chaos like any other failing empire. It’s going to be a very ugly scene. As I said, we’re going to see more crime. We’re going to see more federal intrusion into our lives. We are going to see more geopolitical turmoil. We’re going to start seeing our minds diverted from the financial crisis into more geopolitical affairs. We can also see by Election Day 2008 that the United States is involved in a major geopolitical confrontation, whether it is Iran or Russia.
Geopolitical Tensions Add to Dominoes Falling?
You know, the Russians are really angry at America right now because of Georgia invading South Oscettia and Russia’s response. Since then the Russian stock market has collapsed 45% and Russians are blaming the United States. We’re going to see a lot of dirty dealing going on in a lot of different markets in a lot of different ways.
[ Editor’s Note: Wikipedia – “The 2008 South Ossetia War was a land, air and sea war fought between Georgia, on one side, and the separatist regions, South Ossetia and Abkhazia, and the Russian Federation, on the other. The Ossetians are an Iranian people whose ethnogenesis lies along the Don River. They came to the Caucasus after being driven out of their homeland in the Mongol invasions of the 13th century. Most clans settled in the territories today known as North Ossetia-Alania (currently part of Russia) and South Ossetia (currently northern part of Georgia).]
RUSSIA'S PUTIN WANTS TO BOTH EMBARRASS AND HURT THE UNITED STATES, SO THE NEXT STEP MIGHT BE WHAT BETWEEN RUSSIA AND THE U. S.?
We’re looking to the winter. People have to understand other cultures look at things in a different way than our knee jerk reactionary responses in the United States. Start watching the gas spicket being turned going into the Ukraine and Europe. I’m not certain of the number, but I believe it is 40% to 60% of the natural gas that Europe uses comes out of Russia. You’re going to start seeing Russia turn off spickets. You’re going to see the same thing happen in Venezuela. Those countries are going to start making energy really difficult to get. They aren’t going to give their product away. At the end of the day, Russia and Venezuela are going to get more money for their petroleum products.
DOES THE U. S. HAVE ANY LEVERAGE WITH ANYONE NOW?
The U. S. has no leverage with anybody now. We’re leveraged out. We used to be able to play the financial card. We can’t play that anymore. We used to play the military card. We can’t play that anymore. The United States is losing third world street fights in Afghanistan and Iraq. I don’t care about people telling me the surge is working. That is fairy tale language. As soon as there is a little rest, they are going to attack again. There were major bombings again this last week and they are not going to stop until the United States is thrown out. So, now you have all these countries that have weapons of mass destruction. They are not going to bow to America. It’s not like the old days of Venezuela or Chile or Argentina or Bolivia getting out of hand and the United States sends down gunboat diplomacy.
They are going to fight back and not with bows and arrows and little weaponry. They are armed to the teeth. So, the U. S. has lost its military supremacy and its economic supremacy. Yes, the United States could obliterate any country and bomb them into the Stone Age. But that country, what’s left of it, will retaliate again.
There is still a hole in the ground after the 9/11 attacks. That’s a metaphor. If anybody thinks the American government has the wherewithal, the intelligence or the integrity to get anything done, there is still a hole in the ground seven years later, there are still levees that have not been properly re-built after Katrina and people still can’t vote in the United States and have their vote properly counted because the voting machines don’t work. That’s America now.
IS IT IRONIC THAT BECAUSE OF WHAT HAS HAPPENED IN AMERICA, THE ENTIRE GLOBAL ECONOMY IS BEING DRAGGED DOWN AT THE SAME TIME?
It’s ironic in the fact that the international community bought into the same myths as everyone else. It’s greed that ruined this country and it’s greed that is ruining others. They all played the quick money game.
Another irony is that people could thrive in these times because as the old is dying, something new is being born. If there is intelligence, integrity and dignity behind the next movement, we could move into a new Renaissance, a brighter time and not a dark one.
HOW LONG DO YOU THINK IT WOULD TAKE TO GET OUT OF A DEPRESSION?
As long as it took 1929 and that was a war. And unfortunately, that’s the way authorities will start thinking. The only thing more I can say for this country is that the American people need to regain their dignity and look at their own moral base and what they are accepting as truth and lies. The only thing that will save us is enlightened leadership. I think it has to come from the individual and move up.
And unless people change the way they are living their lives, nothing is going to change. These people, Obama, McCain, Biden and Palin aren’t my leaders. They couldn’t lead me across the street! When are the American people find their own strength and become their own leaders? Until individual people find their own greatness within, nothing is going to change.
To everybody out there, make provisions now like the ant did for a cold, brutal winter wherever you live. Things are going to get very tough. Don’t waste a dime you don’t need to waste. Buy local and support your local community. Start by doing everything locally to preserve and save.”
More Information:
For further reports about trends research, please see other reports below in the Earthfiles Archive:
• 12/21/2006 — Top Trends for 2007 by Gerald Celente• 02/03/2006 — Trends 2006• 12/31/2000 — Top Trends 2001• 01/02/2000 — New Trends for 21st Century• 01/03/1999 — Trends in 1999 with Gerald Celente
© 2008 by Linda Moulton Howe
“This is a classic Titanic situation in the sense that what we saw with the Fannie and Freddie bailouts and the Bear Stearns bailouts and now the AIG request for more than forty billion more dollars from the federal government – it’s just like the Titanic where the rich and affluent were given the lifeboats and the rest of the people went under from steerage. The rich and powerful are too big to fail; the rest of us are too small to save.”- Gerald Celente, Editor and Publisher, The Trends Journal
“They (Republican Party) had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.” - Franklin Delano Roosevelt, 1936, quoted in The FDR Years © 1995 by William Leuchtenburg
Crowd at New York's American Union Bank during a bank runearly in the Great Depression that began in 1929. The bank opened in 1917,and went out of business on June 30, 1931. Image source Wikipedia.
Crowd at IndyMac Bank in Pasadena, California, on Friday, July 11, 2008, after the federal government took control in the second-largest bank failure in U. S. history. Financial experts predicted at least 50 to 100 bank failures in the United States after IndyMac Bank.
Updated 11:00 PM EDT September 17, 2008 - Dow closed 450 down today in continuing “Economic 9/11,” after Feds loan AIG $85 billion and oil and metals spiked upward. “Right now, citizens don't trust banks and bankers don't trust other bankers. The financial system is freezing up,” said a CNBC Business Network analyst.
Investors also considered a report on new home construction that showed that housing starts dipped to a 17-year low. Further, the FDIC website lists 11 bank failures in 2008 since April, the latest being Silver State Bank in Henderson, Nevada, on September 5, 2008. The Pasadena, California, IndyMac Bank FDIC takeover on July 11, 2008, was the second largest bank failure in American history.
September 15, 2008 Rhinebeck, New York - Back on December 21, 2007, I interviewed Gerald Celente, Editor and Publisher of The Trends Journal based in Rhinebeck, New York. Mr. Celente has been interviewed by network newscasters for years and his trend predictions are generally correct. Below is the December 21, 2007, Earthfiles Headline and report I filed.
Trends in 2008
© 2007 by Linda Moulton Howe
“In 2008, we’re going to see some major, giant financial firms fall as they get hit by an economic 9/11.” - Gerald Celente, The Trends Journal
Trends Research Institute, Rhinebeck, New York. Also see: 122107 Earthfiles “Trends in 2008.”
Today, September 15, 2008, I talked to him about his forecast for an “Economic 9/11” - ironically an interview on the same day, September 15, 2008, that Lehman Brothers declared bankruptcy, Merrill Lynch sold to Bank of America for $50 billion and AIG begged the federal government for a $40+ billion bailout. AIG is a huge insurance company doing business in 130 countries with a trillion dollar spreadsheet.
More falling financial dominos from banks to other companies are expected. Are we facing depression greater than the “Great Depression of 1929?” I took that question to Gerald Celente and began by asking him how he was so accurate back in December 2007?
Interview:
Economic 9/11
Gerald Celente, Editor and Publisher, The Trends Journal, Rhinebeck, New York
Gerald Celente, Editor and Publisher, The Trends Journal, Rhinebeck, New York:“Current events form future trends. If you saw the current events unfolding, you could have seen – if you looked at the data objectively – you could have seen where the future was headed. But what happens is that the business media keeps downplaying the seriousness of events. They are not looking at the real fundamentals of what is going on. They are stuck in their Wall Street and Washington worlds. They don’t see what is going on throughout society.
In 2007, our summer edition of The Trends Journal, we warned that between July and November 2007, we would see a major financial crisis. That was the so-called ‘sub-prime’ crisis. What people needed to understand that they would not understand was that it wasn’t only the little people who caused those problems by taking out mortgages they could not pay off. That was only a small part of it. The big part of it was that all of these leverage buyout firms, all of the commercial real estate people, all of the developers that were building on speculation.
You had companies in New York, for example, like The New York Times reported of one that had about $60 million that they leveraged into $60 billion worth of real estate. Look at all the buyout firms such as The Blackstone Group, Carlisle Real Estate, Carlyle Group, Cerberus that bought Chrysler and Hilton. It’s not like these guys put up a billion dollars each and twenty of them bought a company. They bought these companies with no money down based on leverage.
Then there all the financial manipulations: auction-raised securities, Compulsory Purchase Orders (CPOs), Structured Investment Vehicles (SIVs). I mean they make up this stuff and it’s really a Ponzi scheme.
[ Editor’s Note: Wikipedia – “A Ponzi scheme was named after Charles Ponzi, who emigrated from Italy to the United States in 1903 and became notorious for the following scam. A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (alleged profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.”]
It was all collapsing in front of us, but people did not want to believe it. We saw it coming. The top story in our Top 10 Trends of 2008 was the Panic of 2008 and Economic 9/11. We were precisely one week off in calling this the Economic 9/11 (September 11, 2008 was the seventh anniversary of the World Trade Center attacks). And it’s happened! This is the Economic 9/11. The Federal Reserve, the federal government, cannot save the day.
A Great 2008-2009 Depression? “The Feds cannot print enough money to save the day. We’re going into the worst depression that any living person has ever seen. It’s going to be worse than the Great Depression of 1929.”
Do you realize that Barack Obama recently said that he would not rescind the Bush tax cuts. He said this on ABC, September 7, 2008, IF the economy were in a recession. IF the economy is in RECESSION?! This is worse than a recession! We’re going into the greatest depression and people better beware.
I’ll tell you what I know other people are doing. They are taking their money out of the banks. People with a lot of money are moving it overseas into what they think are safer banks. There’s going to be a day here in the United States that the authorities are going to call a Bank Holiday. AIG is calling for more than $40 billion today. The Feds just bailed out Freddie Mac and Fannie Mac to the tune that could cost taxpayers up to $300 billion or more. Our national debt has been increased to at least $12 TRILLION! The Feds cannot print enough money to save the day.
So, we believe what the government is going to do is call a ‘bank holiday.’ You’re going to hear all those fat mouths out there that were saying that everything was OK, the FDIC was going to insure your money. But, Linda, no one is going to be able to get it out all at once. Just like they did in Argentina and they did it in Brazil when their economies collapsed and their currencies collapsed and their economies were sinking. You’re not going to be able to get all your money out at one time. Our government is going to say, ‘It’s insured. Don’t worry about it, but we need to pause. Take a deep breath.’ Oh, boy, do they love that phrase! ‘Take a deep breath.’
Take a look at this last Saturday’s (September 13, 2008) New York Times. The headlines story on the business page is to just pause and reflect. Don’t panic. Everything is OK. The ship is sinking and the best they can say is, ‘Doesn’t the band sound great!’
Implications for Future
WITH EVERYONE RUNNING TO TREASURIES AND INTERNATIONAL MARKETS ON SEPTEMBER 15, 2008, WHAT IS THE BOTTOM LINE TO THE IMPLICATION OF WHAT IS HAPPENING NOW?
We’re going into the worst depression that any living person has ever seen. It’s going to be worse than the Great Depression of 1929 and I’ll give you a some reasons why.
1) In the 1929 Depression, not many people owned homes, so they weren’t carrying that heavy mortgage load. The people who did have homes did not have something called ‘home equity loans,’ which is more money owed on top of the other money. They used to have something else back then called a ‘second mortgage.’ If you had one, you were a loser.
2) Back in the 1929 Depression days, people didn’t have things called ‘credit cards.’
3) The United States didn’t have $14 trillion worth of debt.
4) We still had a manufacturing base in the United States so that when WWII broke out and the economy improved afterwards, we were still able to produce more so than any other country in the world. But now, the U. S. off-shores so much manufacturing now.
5) Back in the Great Depression of 1929, the U. S. government was not $14 trillion in debt and they had a trade surplus, not a trade deficit.
6) We weren’t fighting two wars that have sapped already $2 trillion from our American treasury and it’s getting worse.
“Dragflation”
So, we’re going into a downturn as America is sinking. This is ‘dragflation,’ a term that we at The Trends Journal have coined. When you had stagflation you had a declining and stagnate economy; you had rising inflation. But you also had rising wages. People remember back in the 1970s, they got a 10% cost-of-living increase in our wages.
Now wages are declining, you’re lucky to have a job, the median American household income is below 1999 levels. So we’re in for a devastating crash and people are not prepared for it.
2008's Weak American Dollar
THE TOTAL AMOUNT OF GOLD BULLION IN THE UNITED STATES IN THE FEDERAL RESERVE AND AT FORT KNOX IS ONLY IN A FEW BILLION DOLLARS IF TRANSLATED INTO CURRENT MARKET VALUE. WITH A $14 TRILLION DEBT IN THE UNITED STATES, IT MEANS THAT THE DOLLAR IS NOT BACKED UP BY MUCH.
You’ve got it and it’s not only the dollar we are going to see problems with. We’re going to see all the paper currencies experience the same kind of problems. You’re looking at a global market unraveling. The Russian stock market is down almost 45% from the beginning of 2008. The Chinese and Indian are all down 40% to 50% from their highs. We’re going through a global crisis. We’ve been talking about this for a long time. I was just the keynote speaker at the International Diamond Conference in New York at the Waldorf Astoria on September 8. This is what we at The Trends Journal warned: the United States is going to go into a depression and the rest of the world into different levels of deep recession and depression.
If you look at the markets today, what’s going up and what’s going down? The softer commodities are retreating and the only thing going up in the markets today is gold. It’s coming off its lows where it’s been battered down, but it’s up some $17. We’re still firm believers that gold and diamonds and other precious gems and metals are going to be the things to invest in as the paper currencies collapse. There are no fiscal or monetary tools that can turn this around.
What people I know are doing is taking their money and putting it into other currencies, particularly the Swiss franc, and putting it into more secure international banks, and betting against America on every level. And we know it is only going to get worse. There is nothing to turn this around. What is the Federal Reserve going to do? Print more money?
On September 16, the Federal Reserve is going to decide whether or not to raise or lower interest rates. If they lower interest rates, you’re going to see the dollar plummet. If they keep interest rates the same, then we have the same situation we’re in now. They can’t raise interest rates. If they do, they will put the brakes on an already credit-squeezed economy and that will really push us into a really steep depression quicker than what we have seen. Looking across Europe, you can see the markets collapsing, along with the Russian market down 45%. There is no safety net. Ships do sink!
We like the Swiss franc because Switzerland always seems to survive at the worst of times, including back to World War II. But the Swiss banks are having problems, too. So, you have to be careful about which banks you put your money into. But what we’re saying is that people we know are hedging their bets by keeping some money in dollars and some money in Swiss francs, some money in Euros, so that if one goes down, others are up. So, you are preserving wealth. That’s the game right now. It’s not about making more money. It’s about preserving what you have.
Global Economic Depression?
In China, factory orders are plummeting. They have 1.2 billion people and millions of problems. So, they are not going to escape this global economic collapse either. There is no way out.
Remember the old fable about the grasshopper and the ant. The grasshopper played during the summer thinking it didn’t have to do anything to survive the cold winter coming. People are still acting like grasshoppers. What people are saying is, ‘I’m going to wait until after the elections to see what happens.’ To see what happens for what? The people running for office don’t have the economic skills.
AND WHOEVER IS ELECTED IN NOVEMBER 2008 IS INHERITING THE $14 TRILLION IN DEBT.
On top of that, government, corporate and private debt is over 200 times the gross domestic product, much worse than the Great Depression of 1929.
And Greenspan was saying as recently as May 2008 that the worst was behind us. So, too, was Hank Paulson, the U. S. Treasury Secretary. So, too, was the head of Lehman Brothers, Merrill Lynch and J. P. Morgan. They were all saying that the credit crisis was not as bad as it was because of the great bailouts of Countrywide and Bear Stearns. So, they were singing a different tune than now.
Never before have current events been so clear in front of us that spelled disaster. What is stopping people from admitting that the worst is yet to come and there are no plans to save it? This is a classic Titanic situation in the sense that what we saw with the Fannie and Freddie bailouts and the Bear Stearns bailouts and now the AIG request for $40 more billion from the federal government – it’s just like the Titanic where the rich and affluent were given the lifeboats and the rest of the people went under from steerage. The rich and powerful are too big to fail; the rest of us are too small to save. When we need to be saved, the government saves us with Katrina-quality rescue plans, which means that we drown.
United States Conditions in 2009?
“This Christmas 2008, you’re going to see major chains go bankrupt. If you can see Lehman Brothers go under – guess what? Macy’s, J. C. Penny, GAP and the rest of them could go down, too.”
IF THIS IS WORSE THAN THE GREAT DEPRESSION OF 1929, COULD YOU LAY OUT WHAT YOU EXPECT TO SEE HAPPEN OVER THE REST OF 2008 AND TO FALL 2009?
Let’s take retail sales, for example. This Christmas 2008, you’re going to see major chains go bankrupt. If you can see Lehman Brothers go under – guess what? Macy’s, J. C. Penny, GAP and the rest of them could go down, too.
All these companies, like the leverage buyout firms, have been built on an economic model of growth and expansion. That means opening new stores in new locations, but not necessarily increasing in store sales. You’re going to see major bankruptcies. We forecast this before. It’s going to happen.
You’re also going to see violence go to levels we’ve never seen before. You’re going to start to see gangland mentality that is running through Mexico start seeping up north into the United States. The Mexican government cannot control the level of violence. And we’re going to start to see it happening here: more gangs, more kidnappings, more violence and crime. The knee jerk reaction, of course, will be more police on the streets and that is not going to solve the problem.
We’re also going to see more movements for the break up of the American government – not necessarily in 2008, but we can certainly see the secessionist movements that have been gaining more strength because the federal government cannot fix this problem. It’s too big.
Alan Greenspan - Is Former Fed Chief Cause of Financial Dominoes Falling?
Greenspan is the guy that’s behind this whole collapse. By lowering interest rates during the dotcom bubble of 2000. They lowered the interest rates to 46-year-lows and created the situation that exists now for all this cheap money and all the financial games. Greenspan is the Prince of Destruction. The Federal Reserve is what is behind the destruction of this country and now Greenspan is warning us! He’s the one who caused all this!
Ron Paul (former candidate in 2008 presidential primary) has informed the people that the Federal Reserve is basically a rogue organization. It’s a private bank, it’s not a federal agency. They have taken the power of the money printing press out of the hands of Congress (Article 1, Section 8, Clause 5) that gives Congress the sole authority to print and regulate the money supply. And Alan Greenspan is the one that caused this Great Depression. He started it by bailing out the big guys following the 1987 Stock Market Crash, following the 1997 Asian currency crisis, following the 1998 long-term capital management bailout. I had an Op Ed piece in The New York Times in 1998 that I called ‘Capitalism for Cowards.’ This is what keeps happening – bailing out the big guys by printing cheap money because their friends are too big to fail.
WHAT HAPPENS THIS TIME IF THE UNITED STATES DOES NOT BAIL OUT AIG AND GIVE THEM THE $40 BILLION THEY ARE ASKING FOR?
It’s not going to make any difference whether they bail them out or not.
BUT IT’S IN MORE THAN 130 COUNTRIES WITH A TRILLION DOLLAR BALANCE SHEET.
Yes, but there are other huge ones that are going to be collapsing right along with it. What is going to happen when Blackstone goes under? Or Ceberus goes under? Or the Carlyle Group goes under? We’ve already eliminated the big names of Lehman Brothers and Merrill Lynch. Merrill Lynch was the nation’s largest brokerage firm and they were just gobbled up by Bank of America that was just gobbled up by the failing Countrywide. Who is going to bail out them? There is not enough money to bail them out. Where is the money going to come from? Americans are working two or three jobs already. Do you think they could do four jobs to bail these big people out? Impossible! We’re looking at the collapse of Empire America.
The 9/11 attack happened and it was the greatest military strike in history, much greater than the Trojan Horse. It brought down the financial pillars of the United States figuratively and literally.
The United States as not recuperated from the great strike of 9/11 and the debacle of the dotcom crash. It was temporarily ameliorated by Greenspan by putting interest rates at 46-year-lows and creating the credit bubble. So, it’s over now.
The United States looks like to me what you see when a third world country starts going into chaos like any other failing empire. It’s going to be a very ugly scene. As I said, we’re going to see more crime. We’re going to see more federal intrusion into our lives. We are going to see more geopolitical turmoil. We’re going to start seeing our minds diverted from the financial crisis into more geopolitical affairs. We can also see by Election Day 2008 that the United States is involved in a major geopolitical confrontation, whether it is Iran or Russia.
Geopolitical Tensions Add to Dominoes Falling?
You know, the Russians are really angry at America right now because of Georgia invading South Oscettia and Russia’s response. Since then the Russian stock market has collapsed 45% and Russians are blaming the United States. We’re going to see a lot of dirty dealing going on in a lot of different markets in a lot of different ways.
[ Editor’s Note: Wikipedia – “The 2008 South Ossetia War was a land, air and sea war fought between Georgia, on one side, and the separatist regions, South Ossetia and Abkhazia, and the Russian Federation, on the other. The Ossetians are an Iranian people whose ethnogenesis lies along the Don River. They came to the Caucasus after being driven out of their homeland in the Mongol invasions of the 13th century. Most clans settled in the territories today known as North Ossetia-Alania (currently part of Russia) and South Ossetia (currently northern part of Georgia).]
RUSSIA'S PUTIN WANTS TO BOTH EMBARRASS AND HURT THE UNITED STATES, SO THE NEXT STEP MIGHT BE WHAT BETWEEN RUSSIA AND THE U. S.?
We’re looking to the winter. People have to understand other cultures look at things in a different way than our knee jerk reactionary responses in the United States. Start watching the gas spicket being turned going into the Ukraine and Europe. I’m not certain of the number, but I believe it is 40% to 60% of the natural gas that Europe uses comes out of Russia. You’re going to start seeing Russia turn off spickets. You’re going to see the same thing happen in Venezuela. Those countries are going to start making energy really difficult to get. They aren’t going to give their product away. At the end of the day, Russia and Venezuela are going to get more money for their petroleum products.
DOES THE U. S. HAVE ANY LEVERAGE WITH ANYONE NOW?
The U. S. has no leverage with anybody now. We’re leveraged out. We used to be able to play the financial card. We can’t play that anymore. We used to play the military card. We can’t play that anymore. The United States is losing third world street fights in Afghanistan and Iraq. I don’t care about people telling me the surge is working. That is fairy tale language. As soon as there is a little rest, they are going to attack again. There were major bombings again this last week and they are not going to stop until the United States is thrown out. So, now you have all these countries that have weapons of mass destruction. They are not going to bow to America. It’s not like the old days of Venezuela or Chile or Argentina or Bolivia getting out of hand and the United States sends down gunboat diplomacy.
They are going to fight back and not with bows and arrows and little weaponry. They are armed to the teeth. So, the U. S. has lost its military supremacy and its economic supremacy. Yes, the United States could obliterate any country and bomb them into the Stone Age. But that country, what’s left of it, will retaliate again.
There is still a hole in the ground after the 9/11 attacks. That’s a metaphor. If anybody thinks the American government has the wherewithal, the intelligence or the integrity to get anything done, there is still a hole in the ground seven years later, there are still levees that have not been properly re-built after Katrina and people still can’t vote in the United States and have their vote properly counted because the voting machines don’t work. That’s America now.
IS IT IRONIC THAT BECAUSE OF WHAT HAS HAPPENED IN AMERICA, THE ENTIRE GLOBAL ECONOMY IS BEING DRAGGED DOWN AT THE SAME TIME?
It’s ironic in the fact that the international community bought into the same myths as everyone else. It’s greed that ruined this country and it’s greed that is ruining others. They all played the quick money game.
Another irony is that people could thrive in these times because as the old is dying, something new is being born. If there is intelligence, integrity and dignity behind the next movement, we could move into a new Renaissance, a brighter time and not a dark one.
HOW LONG DO YOU THINK IT WOULD TAKE TO GET OUT OF A DEPRESSION?
As long as it took 1929 and that was a war. And unfortunately, that’s the way authorities will start thinking. The only thing more I can say for this country is that the American people need to regain their dignity and look at their own moral base and what they are accepting as truth and lies. The only thing that will save us is enlightened leadership. I think it has to come from the individual and move up.
And unless people change the way they are living their lives, nothing is going to change. These people, Obama, McCain, Biden and Palin aren’t my leaders. They couldn’t lead me across the street! When are the American people find their own strength and become their own leaders? Until individual people find their own greatness within, nothing is going to change.
To everybody out there, make provisions now like the ant did for a cold, brutal winter wherever you live. Things are going to get very tough. Don’t waste a dime you don’t need to waste. Buy local and support your local community. Start by doing everything locally to preserve and save.”
More Information:
For further reports about trends research, please see other reports below in the Earthfiles Archive:
• 12/21/2006 — Top Trends for 2007 by Gerald Celente• 02/03/2006 — Trends 2006• 12/31/2000 — Top Trends 2001• 01/02/2000 — New Trends for 21st Century• 01/03/1999 — Trends in 1999 with Gerald Celente
Friday, September 19, 2008
The Point of No Return
Harry Reid: "No One Knows What to Do"
The Point of No Return
By MIKE WHITNEY
Following another erratic day of trading on the stock market, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke convened an emergency meeting of the Senate Banking Committee and other congressional leaders to request fast-track authority for a sweeping plan to buy back illiquid assets and other complex securities from distressed and under-capitalized banks. The turbulence in the financial markets has intensified and there is every indication that the situation will get worse before it gets better.
There are a number of signs that the financial system is at the brink of collapse and that Wall Street is headed for a 1929-type crash. Depositors have begun to withdrawal their savings from money market funds alarmed by the gyrations in the market and the daily deluge of bad economic news. According to the Washington Post, funds dropped "by at least $79 billion, or about 2.6 per cent" on Wednesday alone. The withdrawals are the equivalent of a slow bank run just at the time when stressed commercial banks need access to cheap capital to finance daily operations and provide loans for a steadily weakening economy. There's also been a surge of panic-buying of US Treasurys which is considered the safest of investments. According to the Wall Street Journal, during Wednesday's market-rout, "investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment. That's never happened before." (Wall Street Journal) Also, the VIX, or "fear gauge", has soared to levels not seen since the crisis began in August just over a year ago.
On Tuesday, interbank lending rates spiked upwards causing banks to abruptly stop lending to each other. When banks stop lending to each other, they cannot perform their primary function of transmitting credit to consumers and businesses, and the economy shuts down. That is why the Fed and other members of the western banking cartel made a surprise announcement at 3 AM (EST) Wednesday morning.
From the Fed:
"Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets....The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks."
Before the end of the day, the Fed had quadrupled the amount of dollars (to $247 billion) that central banks around the world could access in an effort to loosen up trading between the banks and resume lending to loan applicants and businesses. According to Bloomberg: "The Fed will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets." At first, the stock market reacted positively to the Fed's announcement, but by noon the market was 200 points down and losing altitude fast. It took another surprise announcement by the Treasury Dept -- of a massive government intervention to remove the bad loans and withering mortgage-backed securities from banks' balance sheets -- of to jolt the market out of its funk and send it climbing 410 points higher on the day.
Paulson's emergency session with Congress last night was characterized by lawmakers who attended as "chilling". The situation is much worse than government officials have let on so far. The resurrecting of the Resolution Trust Corporation (RTC) is a desperate attempt to address the banking systems troubles head-on by providing a taxpayer-funded clearinghouse for illiquid assets and toxic mortgage-related securities for which there is presently no market. The taxpayer is being asked to pay up to $1 trillion for the speculative excesses of Wall Street investment banks and their fraudulent securities scam. Homeowners who are likely to lose their homes through foreclosure will not benefit from Paulson's RTC. Both presidential candidates have already declared their support for the plan.
According to the New York Times: "Rumors about the Bush administration’s new stance swept through the stock markets Thursday afternoon. By the end of trading, the Dow Jones industrial average shot up 617 points from its low point in mid afternoon, the biggest surge in six years, and ended the day with a gain of 410 points or 3.9 percent."
If ever there was proof of Plunge Protection Team activity; Thursday's market is it. The market was sinking fast at midday even though the Fed just added nearly $250 billion in liquidity to the global system. Investors were buying short-term Treasurys in record numbers, the VIX "fear gauge" was soaring, money markets were collapsing, and the aftershocks from defaulting AIG and Lehman were still being felt around the world. Were investors really that eager to buy back battered investment bank stocks or was the PPT busy panic-buying up futures and forcing the market upwards 617 points?
Bloomberg News: "Options under consideration (by congress) include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change."
Not a dime of public money is provided for over-extended mortgage-owners trying to stay in their homes. Not one congressman or senator at Thursday's meeting rejected the bailout plan or called for a criminal investigation of to establish whether laws were broken in the sale of fraudulent securities which have clogged the global system; pushed banks, hedge funds, insurance companies and homeowners into default, and precipitated the greatest financial crisis in the nation's 230 year history.
Ironically, the very people who created this mess, are the ones who will decide how to resolve it; the Federal Reserve and the US Treasury. Where else, but Washington would such massive failure be rewarded with more power and authority.
The investment giants and the Federal Reserve are entirely responsible for the current meltdown. Currency deregulation brought foreign capital flooding into the equities and bond markets while the real economy suffered. Businesses were off-shored while good paying manufacturing jobs were moved overseas. Wall Street gorged itself on foreign capital while America was transformed into a nation of construction workers and service industry workers. Now those jobs are vanishing by the millions and unemployment lines are swelling.
The ratings agencies, prevaricating mortgage applicants, and appraisers all played a part, but it's Wall Street that's really to blame. They lobbied to deregulate the system so investment banks could merge with commercial banks and allow the world's biggest risk takers to have unrestricted access to the cheapest capital available; deposits. They even crafted a bogus ideology, "market fundamentalism"; touting trickle-down, free market, Voodoo economics that was entirely designed to further enrich the wealthy and savage the middle class. Earlier this week, former Senator Jack Kemp appeared at a whistle-stop with John McCain in Jacksonville, Florida. Kemp was one of the primary architects of "supply side" economics, the thoroughly discredited Reagan-era doctrine which has led us to our present economic catastrophe. Kemp's theories fit with Milton Friedman's "greed is good" Chicago School mumbo jumbo. Both Friedman and Kemp believe that what is good for the stock market is good for America, ignoring the shocking economic polarization that has divided the nation. Now, more and more people are beginning to see that Friedman was a charlatan who provided ideological cover for obscenely rich financiers and their dodgy investment scams.
Economist and author Henry Liu summed it up brilliantly in a recent article in the Asia Times:
"The collapse of market fundamentalism in economies everywhere is putting the Chicago School theology on trial. Its big lie has been exposed by facts on two levels. The Chicago Boys' claim that helping the rich will also help the poor is not only exposed as not true, it turns out that market fundamentalism hurts not only the poor and the powerless; it hurts everyone, rich and poor, albeit in different ways. When wages are kept low to fight inflation, the low-wage regime causes overcapacity through over investment from excess profit. And monetary easing under such conditions produces hyperinflation that hurts also the rich. The fruits of Friedman test are in - and they are all rotten."
Whatever headwinds the country now faces economically can be directly attributed to the inherently flawed ideology of market fundamentalism.
Tuesday's 449 point bloodbath on Wall Street is the beginning of an unavoidable market crash. Regardless of Paulson's plan, there's more pain on the way. According to Bloomberg: "More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy." All of the economic indicators point to greater losses. Once the system begins to deleverage, there's nothing anyone can do to stop it. Paulson can place himself in front of a market avalanche if he chooses, but it won't change the outcome. Market corrections are as inexorable as the force of gravity. That's why equity bubbles cannot be allowed to develop without interest rate intervention. Responsible action by the Central Bank could have prevented the present crisis.
On Wednesday, Forex.tv reported that the net long-term TIC flows came in below the consensus forecast, totaling $6.1 billion in July, while total TIC flows for the month fell to $74.8 billion, according to data released by the U.S. Treasury on Tuesday morning. Economists had been expecting net long-term flows to rise to $55.0 billion compared to the previous month's previously reported figure of $53.4 billion.
$6.1 billion does not meet the requirements of our current account deficit of $700 billion. The dollar is headed for a fall.
On Wednesday, New York Mayor Michael Bloomberg warned that the "next wave" of financial pain may come from overseas if foreign entities stop buying U.S. debt." It's not clear who's going to be buying our debt," said Bloomberg. "It may very well be that the next wave is going to come back and bite us."
The New York Times tells a similar story except this time about Asia:
"Asia’s savings have, in essence, bankrolled American spending for decades (but) Asian interest in American assets is wilting, a trend that seems to have started over the summer...Little-noticed data released by the Treasury Department on Tuesday showed that a sharp shift in international capital movements began in July. Private investors pulled a net $92.9 billion out of the United States, after putting $46.8 billion into American securities in June. ("Asia rethinks American Investments Amid Market Upheaval", Keith Bradsher, New York Times)
Foreign central banks and investors have turned off the tap. They can see that the US financial system is teetering and that the dollar is weakening. "The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own balance sheet." (Bloomberg News) The "full faith and credit" of the United States government is slipping. US debt will be downgraded. Triple A is no longer guaranteed. America's stock just moved to Level 3 assets. The US is now a subprime economy on life support.
Presently, "there is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion." (Mish's Global Economic Trend Analysis)
$273.7 Billion is a paltry sum, insufficient to meet the needs of even a minor run on the banking system. The storm hasn't even touched ground yet in middle America, and already the system is buckling. 2009 will be bleak, indeed.
The battered and over-leveraged US financial system is facing its greatest challenge in the months ahead. The frantic search for capital has already begun, but with predictably disappointing results. Neither China nor the Saudi princes are buying any more failing investment banks. They'll leave that for the US taxpayer. What started off as a brilliant plan to pedal garbage mortgage-backed paper to gullible investors around the world has suddenly backfired and now threatens to bring the entire system crashing down and change the geopolitical power paradigm for the forseeable future.
On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the events of the last 14 months. He said, ""We are in new territory, this is a different game...No one knows what to do."
Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com
The Point of No Return
By MIKE WHITNEY
Following another erratic day of trading on the stock market, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke convened an emergency meeting of the Senate Banking Committee and other congressional leaders to request fast-track authority for a sweeping plan to buy back illiquid assets and other complex securities from distressed and under-capitalized banks. The turbulence in the financial markets has intensified and there is every indication that the situation will get worse before it gets better.
There are a number of signs that the financial system is at the brink of collapse and that Wall Street is headed for a 1929-type crash. Depositors have begun to withdrawal their savings from money market funds alarmed by the gyrations in the market and the daily deluge of bad economic news. According to the Washington Post, funds dropped "by at least $79 billion, or about 2.6 per cent" on Wednesday alone. The withdrawals are the equivalent of a slow bank run just at the time when stressed commercial banks need access to cheap capital to finance daily operations and provide loans for a steadily weakening economy. There's also been a surge of panic-buying of US Treasurys which is considered the safest of investments. According to the Wall Street Journal, during Wednesday's market-rout, "investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment. That's never happened before." (Wall Street Journal) Also, the VIX, or "fear gauge", has soared to levels not seen since the crisis began in August just over a year ago.
On Tuesday, interbank lending rates spiked upwards causing banks to abruptly stop lending to each other. When banks stop lending to each other, they cannot perform their primary function of transmitting credit to consumers and businesses, and the economy shuts down. That is why the Fed and other members of the western banking cartel made a surprise announcement at 3 AM (EST) Wednesday morning.
From the Fed:
"Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets....The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks."
Before the end of the day, the Fed had quadrupled the amount of dollars (to $247 billion) that central banks around the world could access in an effort to loosen up trading between the banks and resume lending to loan applicants and businesses. According to Bloomberg: "The Fed will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets." At first, the stock market reacted positively to the Fed's announcement, but by noon the market was 200 points down and losing altitude fast. It took another surprise announcement by the Treasury Dept -- of a massive government intervention to remove the bad loans and withering mortgage-backed securities from banks' balance sheets -- of to jolt the market out of its funk and send it climbing 410 points higher on the day.
Paulson's emergency session with Congress last night was characterized by lawmakers who attended as "chilling". The situation is much worse than government officials have let on so far. The resurrecting of the Resolution Trust Corporation (RTC) is a desperate attempt to address the banking systems troubles head-on by providing a taxpayer-funded clearinghouse for illiquid assets and toxic mortgage-related securities for which there is presently no market. The taxpayer is being asked to pay up to $1 trillion for the speculative excesses of Wall Street investment banks and their fraudulent securities scam. Homeowners who are likely to lose their homes through foreclosure will not benefit from Paulson's RTC. Both presidential candidates have already declared their support for the plan.
According to the New York Times: "Rumors about the Bush administration’s new stance swept through the stock markets Thursday afternoon. By the end of trading, the Dow Jones industrial average shot up 617 points from its low point in mid afternoon, the biggest surge in six years, and ended the day with a gain of 410 points or 3.9 percent."
If ever there was proof of Plunge Protection Team activity; Thursday's market is it. The market was sinking fast at midday even though the Fed just added nearly $250 billion in liquidity to the global system. Investors were buying short-term Treasurys in record numbers, the VIX "fear gauge" was soaring, money markets were collapsing, and the aftershocks from defaulting AIG and Lehman were still being felt around the world. Were investors really that eager to buy back battered investment bank stocks or was the PPT busy panic-buying up futures and forcing the market upwards 617 points?
Bloomberg News: "Options under consideration (by congress) include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change."
Not a dime of public money is provided for over-extended mortgage-owners trying to stay in their homes. Not one congressman or senator at Thursday's meeting rejected the bailout plan or called for a criminal investigation of to establish whether laws were broken in the sale of fraudulent securities which have clogged the global system; pushed banks, hedge funds, insurance companies and homeowners into default, and precipitated the greatest financial crisis in the nation's 230 year history.
Ironically, the very people who created this mess, are the ones who will decide how to resolve it; the Federal Reserve and the US Treasury. Where else, but Washington would such massive failure be rewarded with more power and authority.
The investment giants and the Federal Reserve are entirely responsible for the current meltdown. Currency deregulation brought foreign capital flooding into the equities and bond markets while the real economy suffered. Businesses were off-shored while good paying manufacturing jobs were moved overseas. Wall Street gorged itself on foreign capital while America was transformed into a nation of construction workers and service industry workers. Now those jobs are vanishing by the millions and unemployment lines are swelling.
The ratings agencies, prevaricating mortgage applicants, and appraisers all played a part, but it's Wall Street that's really to blame. They lobbied to deregulate the system so investment banks could merge with commercial banks and allow the world's biggest risk takers to have unrestricted access to the cheapest capital available; deposits. They even crafted a bogus ideology, "market fundamentalism"; touting trickle-down, free market, Voodoo economics that was entirely designed to further enrich the wealthy and savage the middle class. Earlier this week, former Senator Jack Kemp appeared at a whistle-stop with John McCain in Jacksonville, Florida. Kemp was one of the primary architects of "supply side" economics, the thoroughly discredited Reagan-era doctrine which has led us to our present economic catastrophe. Kemp's theories fit with Milton Friedman's "greed is good" Chicago School mumbo jumbo. Both Friedman and Kemp believe that what is good for the stock market is good for America, ignoring the shocking economic polarization that has divided the nation. Now, more and more people are beginning to see that Friedman was a charlatan who provided ideological cover for obscenely rich financiers and their dodgy investment scams.
Economist and author Henry Liu summed it up brilliantly in a recent article in the Asia Times:
"The collapse of market fundamentalism in economies everywhere is putting the Chicago School theology on trial. Its big lie has been exposed by facts on two levels. The Chicago Boys' claim that helping the rich will also help the poor is not only exposed as not true, it turns out that market fundamentalism hurts not only the poor and the powerless; it hurts everyone, rich and poor, albeit in different ways. When wages are kept low to fight inflation, the low-wage regime causes overcapacity through over investment from excess profit. And monetary easing under such conditions produces hyperinflation that hurts also the rich. The fruits of Friedman test are in - and they are all rotten."
Whatever headwinds the country now faces economically can be directly attributed to the inherently flawed ideology of market fundamentalism.
Tuesday's 449 point bloodbath on Wall Street is the beginning of an unavoidable market crash. Regardless of Paulson's plan, there's more pain on the way. According to Bloomberg: "More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy." All of the economic indicators point to greater losses. Once the system begins to deleverage, there's nothing anyone can do to stop it. Paulson can place himself in front of a market avalanche if he chooses, but it won't change the outcome. Market corrections are as inexorable as the force of gravity. That's why equity bubbles cannot be allowed to develop without interest rate intervention. Responsible action by the Central Bank could have prevented the present crisis.
On Wednesday, Forex.tv reported that the net long-term TIC flows came in below the consensus forecast, totaling $6.1 billion in July, while total TIC flows for the month fell to $74.8 billion, according to data released by the U.S. Treasury on Tuesday morning. Economists had been expecting net long-term flows to rise to $55.0 billion compared to the previous month's previously reported figure of $53.4 billion.
$6.1 billion does not meet the requirements of our current account deficit of $700 billion. The dollar is headed for a fall.
On Wednesday, New York Mayor Michael Bloomberg warned that the "next wave" of financial pain may come from overseas if foreign entities stop buying U.S. debt." It's not clear who's going to be buying our debt," said Bloomberg. "It may very well be that the next wave is going to come back and bite us."
The New York Times tells a similar story except this time about Asia:
"Asia’s savings have, in essence, bankrolled American spending for decades (but) Asian interest in American assets is wilting, a trend that seems to have started over the summer...Little-noticed data released by the Treasury Department on Tuesday showed that a sharp shift in international capital movements began in July. Private investors pulled a net $92.9 billion out of the United States, after putting $46.8 billion into American securities in June. ("Asia rethinks American Investments Amid Market Upheaval", Keith Bradsher, New York Times)
Foreign central banks and investors have turned off the tap. They can see that the US financial system is teetering and that the dollar is weakening. "The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own balance sheet." (Bloomberg News) The "full faith and credit" of the United States government is slipping. US debt will be downgraded. Triple A is no longer guaranteed. America's stock just moved to Level 3 assets. The US is now a subprime economy on life support.
Presently, "there is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion." (Mish's Global Economic Trend Analysis)
$273.7 Billion is a paltry sum, insufficient to meet the needs of even a minor run on the banking system. The storm hasn't even touched ground yet in middle America, and already the system is buckling. 2009 will be bleak, indeed.
The battered and over-leveraged US financial system is facing its greatest challenge in the months ahead. The frantic search for capital has already begun, but with predictably disappointing results. Neither China nor the Saudi princes are buying any more failing investment banks. They'll leave that for the US taxpayer. What started off as a brilliant plan to pedal garbage mortgage-backed paper to gullible investors around the world has suddenly backfired and now threatens to bring the entire system crashing down and change the geopolitical power paradigm for the forseeable future.
On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the events of the last 14 months. He said, ""We are in new territory, this is a different game...No one knows what to do."
Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com
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